Snap share price: what to expect in Q1 earnings

Snap’s share price cratered in February after Q4 earnings missed Wall Street expectations. Q1’s numbers on Tuesday will show how the messaging app is faring during the coronavirus pandemic.

While people are more reliant on products like Snap [SNAP] to communicate, during lockdown, advertising budgets are being tightened the world over. A big problem for Snap, which is dependent on advertisers for the lion’s share of its profits. A significant dip in advertising revenue is likely to prove detrimental to post-earnings share price performance.

So what’s going to happen in Q1 earnings? And how will the results affect Snap’s share price?

Snap's share price is down 23% this year, underperforming the wider market with the S&P 500 down just over 13% in the same period. In part, the losses are due to underwhelming Q4 results posted in February, alongside the coronavirus induced volatility.

However, since mid-March, Snap’s share price has mounted a comeback - up 54% as traders buy into companies helping people communicate during the lockdown.

Trading around $13, the share price is above its 52-week low of $7.89 and $11.96 50-day moving average.

23%

Snap's share price decline since start of the year

Why should investors care?

Lockdown boosts usage...

Given that most of us are living in lockdown, it's no surprise that there's been an upswing in the use of products like Snap. The company has seen use of its voice and calling features up 50% at the end of March, compared to late February.

Group chats in the platform have also reached an all-time high in this period, while health and wellbeing content has driven user engagement. Then there are new features like Lens Studio 2.0 which should draw in subscribers in the 13 to 24 age bracket.

For an advertising dependent messaging app, increasing the number of daily users on the platform is key for Snap’s bottom line and investor confidence.

...but advertising revenue under strain

Despite the growth in usage, a global recession will certainly affect apps like Snap, which are essentially advertising platforms. How exposed is Snap? Well, Michael Wiggins De Oliveira on Seeking Alpha points out that 98% of Snap's revenue comes from advertising.

Worryingly, price per ad impression has been on the decline in recent quarters. This will likely hurt revenues. Snap is a company that depends on continual growth to get investors interested. Any downturn in earnings will undoubtedly be felt in the share price.

98%

of Snap's revenue comes from advertising

What do analysts expect?

Wall Street is expecting earnings to come in at -$0.07 a share, down 30% from the same quarter last year. Revenue is expected at $461.11 million, up 36.1%. This would also be the smallest year-on-year quarterly revenue growth in three years. But given Q1 covers the onset of a worldwide pandemic, investors might consider this a robust performance.

Investors should keep an eye on revenue. In Q4, Snap missed the $562 million that Wall Street predicted, which resulted in a 10% sell-off in the share price.

$461.11million

Snap's predicted revenue - a 36.1% increase

According to Zacks, daily active users (DAU) are looking to come in between 224 million and 225 million, up 18%. Alongside average revenue per visitor, DAU is a key metric to watch as Snap seeks to deliver eyeballs for advertisers.

Time to buy Snap’s share price?

Out of the 36 analysts tracking the stock on Yahoo Finance, 36 rate it a Hold. The stock carries an average share price target of $16.76. Hitting this would see a 29%% upside on the current price. Earlier in April both Goldman Sachs and MKM Partners reiterated their Buy rating on the share price.

Whether Snap can continue its growth story remains to be seen. Twitter [TWTR] has already withdrawn revenue and income guidance due to the adverse effects of the outbreak. If Snap starts cutting its growth estimates, investors might find it harder to back the stock.

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